Q         Dear Rick:

I’m in a situation where I need about $50,000 from my portfolio. I need your help in deciding where I should take it from.  The three options that I have are to withdraw it from my IRA.  Second, is to take it from an annuity; or my third choice is to sell some individual stocks which I own.  Because I am still working, I want to minimize the tax consequences as much as possible.  You should know that my IRA is a traditional IRA.  The annuity no longer has a penalty provision.  It’s a variable annuity that I bought for $75,000 and today it is worth just under $100,000.  The stock I own is worth about $60,000.  I bought it a few years ago for about $40,000.  I’ve talked to a couple different people and I’ve gotten different answers and that is why I hope you can tell me where to get the money from and at the same time, it won’t kill me on taxes.

 

Paul

 

A         Dear Paul:

There are tax consequences to all three of your options.  The option that is the least tax friendly is the withdrawal from your IRA.  Since this is a traditional IRA, all the money that you withdraw is taxed at your ordinary income bracket-which is your highest bracket.  Therefore, this is the least friendly option.

 

With regard to the annuity, since this was non-qualified money; in other words, it wasn’t in an IRA, you have a basis.  Therefore, if you close out the entire annuity the only thing you would be taxed on is the difference between what you paid for it and what it is worth today.  In your situation that would be approximately $25,000.  What this means is that the first $25,000 that you withdraw from the annuity would be subject to ordinary income taxes and the remaining money would be tax free.  Therefore, if you withdraw the $50,000 from the annuity, $25,000 would be subject to ordinary income tax and the remaining money would be tax free.

 

The third option from purely a tax standpoint is the best for you.  If you sold the entire stock for $60,000, the only amount subject to tax would be the difference between what you paid for the stock and what you sold it for, which in this case would be $20,000.  However, unlike the money in the IRA and the annuity, which is subject to ordinary income taxes, the sale of stock is subject to capital gain tax, which is your lowest tax rate.  Therefore, from purely a tax standpoint, selling the individual stock would be the most tax efficient way of freeing up money from your portfolio.

 

One last note and that is since your variable annuity no longer has any penalties, you should look at the expenses being charged in the annuity and consider transferring the annuity into a lower cost, commission-free variable annuity.  Many variable annuities have very high fees and as far as I’m concerned, they are unnecessary.  Companies like Fidelity, Schwab and Vanguard all offer very low cost commission-free variable annuities.  Therefore, particularly when an annuity no longer has a penalty provision, it makes sense to transfer it into a lower cost no commission annuity.  One of the beauties of the annuities I mentioned is they also have no backend penalties; therefore, not only do you benefit from having lower fees, but you can withdraw the money whenever you want, penalty free.

 

To transfer annuities between companies is relatively simple and is known as a 1035 exchange.  All you need to do is to take your annuity statement to one of the three companies I mentioned and they will do all the necessary paperwork to have the money transferred.  There are no tax consequences and as far as I’m concerned, it’s a win-win for investors.  Not only will you have very good investment options, but you’ll have substantially lower fees.  Lower fees equal better returns and that means more money in your pocket, exactly where it belongs.

 

Good luck!

 

 

 

If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com